Financing Small Water Supply and Sanitation Service Providers.

The Water and Sanitation Program is an

international partnership for improving water

and sanitation sector policies, practices, and

capacities to serve poor people

Financing Small Water Supply and SanitationService Providers

SUMMARY REPORT

Meera Mehta and Kameel Virjee

Increasingly small water and sanitation service providers, such as community-based organizations and private sector suppliers, are being

acknowledged as important suppliers within the African water and sanitation sector. One of the important constraints faced by these

providers is finance and access to credit. This paper discusses the development of the microfinance sector and services in sub-Saharan

Africa and the potential demand for financial services by small water and sanitation service providers. The role of governments and

development partners in facilitating the finance and credit for small providers is also dis discussed.

Exploring the Microfinance Option in Sub-Saharan Africa

2 FINANCING SMALL WATER SUPPLY AND SANITATION SERVICE PROVIDERS

Introduction

It is increasingly recognized that a vital role is

played in the provision of water and sanitation

services in Sub-Saharan Africa by small

service providers (SSPs). These come in

many forms, including informal private sector

suppliers, community-based organizations

(CBOs), and households as self-providers.

Recent studies suggest that their share in total

services is high, especially when it comes to

the services for the poor in both rural and

urban areas. For example, there are an

estimated 12,000 water schemes managed

by communities in rural areas in Ethiopia;

CBOs account for about 30 percent of

serviced rural population in Kenya; and private

informal providers account for 10 percent of

the serviced population in urban areas in

Kenya (WSP-AF 2003a).

As strategies to meet the Millennium

Development Goals (MDGs) are explored, the

role of these small providers needs to be

better understood. While many different

measures are necessary to strengthen their

role in service delivery, one constraint

emphasized in several studies is their lack of

access to credit. To remedy this, it is

necessary to understand the nature of their

demand for finance and explore sustainable

measures to improve their access to credit.

This paper discusses the possible role of

microfinance in financing small water supply

and sanitation (WSS) service providers. The

importance of microfinance is often

recognized, though generally not adequately

explored in practice. For example, the

Ministerial Declaration at the Bonn

Conference on Freshwater mentioned

community-based finance as one of the key

sources to meet the gap between the funds

needed for increased provision of WSS

services and those available from

governments and donors.

The Recommendations for Action, however,

did not specifically address related issues and

constraints (Bonn Conference on Freshwater

2001a and 2001b). The recent report of the

Camdessus panel emphasized that

“microcredit schemes are also important in

financing community water projects and small

local producers” (Camdessus 2003).

In Sub-Saharan Africa, this will need to be

assessed in the context of a microfinance

sector which is as yet less developed, though

greater outreach and viability is possible in

some countries.

The paper explores three central questions:

How does the level of development of

the microfinance sector in Sub-

Saharan Africa affect the potential for

financing small WSS service

providers?

1.

3FINANCING SMALL WATER SUPPLY AND SANITATION SERVICE PROVIDERS

Two main constraints face the

microfinance sector in Sub-Saharan

Africa: limited outreach and lack of

market-linked product development,

though there are some variations

between countries, especially when

viewed within the wider financial systems

approach.

What is the nature of latent demand

for finance from small WSS service

providers?

The nature of demand varies across the

three market segments of small WSS

service provision: CBOs as providers,

small private providers, and households

as self-providers.

What role can governments and

development partners play? Such roles

may include developing or revising WSS

policies, supporting communities and

other stakeholders, action research, and

knowledge management.

2.

3.


The microfinance sector in Sub-Saharan

Africa is still relatively young. The vast majority

of MFIs in the region are still in the start-up

and/or consolidation phase and are grappling

with capacity, outreach, and viability issues.

However, when viewed from a wider financial

systems perspective there are some

exceptions, as the experience from Kenya

illustrates. Based on studies in selected

countries in the region1, some key features

are:

Market size and penetration.

Microfinance in Sub-Saharan Africa lags

behind developments in Asia and Latin

America. Though it has been estimated

that there are over 1,000 providers/

initiatives in the region, perhaps only 20

are on the way to sustainability. Market

penetration is relatively low, estimated at

7 percent of all poor households in West

Africa and at even lower levels in East

and southern Africa (ICC 2002; World

Council of Credit Unions 2000). However,

Kenya may be an exception, with the total

member outreach of all microfinance

providers being about 1.8 mill ion,

suggesting about 30 percent penetration

of the poor.

Outreach. Level of outreach in terms of

clients served is significantly lower than

in Asia and Latin America. Compared to

over 2 million clients for the Grameen

Bank and BRI in Indonesia, or the 73,000

reached by Bancosol in Bolivia and

170,000 by the SEWA Bank in India, the

largest MFI in Uganda reaches only

25,000 clients, ABA in Egypt just over

18,000, Mozambique’s only operator

about 4,000, and K-REP, regarded as

one of Africa’s most successful MFIs, just

over 14,000 clients. Examples from

countries in Sub-Saharan Africa suggest

that the majority of MFIs have very limited

outreach. Again, however, an exception

in this regard is the cooperative sector in

Kenya, which in 2001 had over 1.7 million

clients and an outstanding loan portfolio

of over Kshs 28 billion (US$0.4 billion).

Financial performance. In general MFIs

in Sub-Saharan Africa perform poorly,

especially compared to the MFIs in South

America and Asia, which perform better

in terms of portfolio quality and

operational and financial sustainability.

Comparative statistics from the best

performing MFIs in Africa clearly show

that most have negative profit margins

(measured as adjusted net operating

income/operating income).2 Assessment

of the financial performance of other

microfinance providers, such as the

cooperative sector in Kenya or the

banking sector in Senegal, is not readily

available.

The African Microfinance Sector and WSSServices Finance

1. Mainly based on ICC 2002, with Virjee2002 for inputs on Kenya.

2.Based on Microbanking bulletin 1999 asreported in table 2 in ICC 2002, volume I.


Products. The introduction of new

products is indicative of an awareness

of the need to respond to market

demands to increase outreach and

performance. There is little product

diversification in Sub-Saharan Africa. In

general the majority of MFIs only offer

one credit product: loans for

incomegenerating activity. MFIs in Asia

and Latin America have developed a

wider range of products, which include

consumer financing, housing loans,

infrastructure loans (including those

offered for water and sanitation)3, and

educational loans. While some MFIs in

Africa have started to diversify their

products the majority have simply

increased the scope of loan usage

without significantly changing the terms

and conditions of their original working

capital loan product.

Donor support. In Sub-Saharan Africa

donor support was previously

characterized by the provision of grants

and soft loans for start-up capital,

operational losses, and portfolio growth,

but now increasingly addresses MFI

sustainability and the integration of

microfinance into the wider financial

system. The transactional relationship

between donors and MFIs has also

evolved. Donors are increasingly

behaving as financial investors, seeking

to invest in high-potential, high-

performing MFIs, as well as high-potential

start-ups.

Additionally donors are seeking opportunities

to sponsor innovation and practices that will

contribute to financial sector deepening and

widening.

In this context of a weak microfinance sector

and an emerging innovative outlook by the

donor community towards financial

sustainability, any WSS initiative that explores

links with the microfinance sector must

address capacity, outreach, and financial

viability issues. Products, services, and

programs must be aligned with microfinance

in accordance with the good practice

principles that underpin sustainability. The

premise of this paper is that microfinance

sector concern about outreach, sustainability,

and product diversification provides

opportunities to explore partnerships with

WSS initiatives. While developing these

opportunities, however, care has to be taken

to ensure that:

The provision of microfinance is not

limited to conventional MFIs, but is used

in a financial systems perspective and

takes into account different financial

institutions providing such services in any

given country. In Kenya, for example, the

cooperative sector has good outreach

and efforts to start other intermediaries,

such as financial services associations

(FSAs), have also been initiated (Virjee

2002). Thus, reference to MFIs in this

paper includes a wider set of financial

institutions that provide microfinance

services to their clients. These may be

3. See WSP-SA n.d. and World Bank 2003for a description of some examples from

India.


commercial banks, specialized

microfinance banks or institutions, NGO-

linked microcredit, licensed operators,

specialized cooperative or public banks

(as in Kenya and Tanzania), village

banks, and other membership-based

operations.4

The emphasis is not put on ‘forcing’ MFIs

or other financial institutions to lend to

the WSS sector through directed credit,

but on financially sustainable market

development through the promotion of

lending opportunities to different types of

WSSrelated SSPs, as discussed above.

MFI products in Africa must overcome two

serious constraints: the short tenor of most

credit, and very high interest rates. The issue

of short tenor needs to be addressed in

relation to the availability of medium- to long-

term funds in order to avoid a term mismatch.

The high cost of funds can be addressed at

least partly through a greater focus on savings

mobilization. Experience with community-

based finance institutions suggests that they

tend to build up savings rapidly and need to

look for credit opportunities. This is true for

several MFIs in India as well as the SACCOs

in Kenya (World Bank 2003; Chao-Beroff and

others 2000, p. 37).

Thus if savings mobilization is strengthened,

resources can be mobilized at more

reasonable costs. With a high savings

collection, opportunities for credit for WSS-

related activities would help to address the

problem of low credit-to-deposit ratios faced

by those MFIs that successfully mobilize

savings. MFIs need to also address the issue

of their own costs and their impact on spreads.

Some of these issues will need to be

addressed within efforts for microfinance

sector regulation, as discussed in section 3

below. Two opportunities for MFIs to increase

outreach and develop market-based products

are here identified, along with some potential

country specific initiatives:

Enhancing MFI Outreach through WSS

Initiatives

A key characteristic of the WSS sector is its

potential to reach the entire population. In the

context of the MDGs this becomes even more

relevant, as plans to extend coverage and

reinforce the sustainability of existing services

are developed and implemented. However,

this will require the development of rules for

engagement that incorporate appropriate

community cost-sharing arrangements. A

second important characteristic is the very

large number of ongoing WSS operations

requiring financial services and periodic

access to cash flow–backed credit to meet

the costs of major repairs and investments

for expansion and augmentation. These WSS

characteristics are particularly important in

view of the fact that “microfinance is a high-

volume/low-margin business. MFIs must

therefore develop products and systems that

maximize outreach to achieve economies of

scale” (ICC 2002:64). Two situations are likely

to be relevant in the context of WSS:

In areas where MFIs already have a

presence, their involvement may be

through (a) financial services for routing

4. See table 1 in ICC 2002, volume II, forcharacteristics of different types ofmicrofinance service providers.


the capital investment funds for water

schemes (refer to boxes 2 and 4); or (b)

financial services during operations in the

postimplementation phase, especially for

depositing the proceeds from water sales

in rural schemes and to provide credit for

major repairs and expansion/

augmentation (refer to boxes 3 and 4).

In areas where MFIs have only a limited

presence, their involvement would

require widening the membership base

linked to deposits from new members to

pay the cash contributions. This would

require some coordination with a planned

WSS program operation.5

In both cases participation in a WSS-linked

operation would enable the MFIs to extend

outreach in a sustainable manner, provided

that increased outreach grows from

expressed demands rather than donor

sponsored directives. Such services do not

represent a oneoff operation but provide

opportunities for service provision and lending

on an ongoing basis. As MFIs in Africa move

to savings promotion among clients,

opportunities for such lending will necessarily

increase. In India, for example, the experience

of several MFIs suggests that with successful

savings mobilization, they face low credit-to-

deposit ratios and therefore need to explore

new lending opportunities. This, however,

requires support from government policy for

appropriate financing rules and a linked

demand promotion program for household or

community facilities.

Strengthening Market-Based Product

Development Capacity through WSS

The development of WSS-linked products can

strengthen MFI capacity through well-

designed support. Two areas that may offer

such an opportunity are:

Financial services for CBO-managed

schemes, where the CBO is involved in

design, implementation, part funding, and

complete managerial and financial

responsibility for operation and

maintenance. Two avenues are possible:

(a) financial services to collect/deposit

user charges and possible credit for

Box 1: Market-Based Product Development for MFIs Supported by MicroSave-Africa

MicoSave-Africa is a project funded by CGAP, DFID, and UNDP. It promotes the development of savings and other client-

responsive financial services among MFIs in 11 countries in East and Southern Africa. Its particular focus has been on

savings mobilization, market research and product development for microfinance. Action research in different countries

involves helping MFIs to listen better to clients and design appropriate financial products based on better market information.

Market research essentially involves a better understanding of the environment and client needs, which results in improved

marketing and promotion, refining or developing new products and improving delivery systems. Market research will need

to be adapted to the nature and maturity of the MFI, and include both ongoing and periodic activities. Based on these

results and through consultative brainstorming, the next step is to develop a product concept. This is converted to a

prototype for pilot testing. MicroSave-Africa has developed tools to support MFIs for such market research and pilot

testing.

Sources: MicroSave-Africa 2001 and Wright 2001.

5. A good example of this opportunity isfrom India, where the SEWA Bank hasbeen involved with the slum improvementprogram of the local authority inAhmedabad.


repairs and expansion/augmentation of

ongoing CBO schemes that are already

collecting user charges; and (b) financial

services for new CBO schemes in the

form of management of capital grants and

later collection and deposit of user

charges, leading to credit after a period

of about two years. In the second case,

a link up with the project/program

financier may be essential.

Credit for household facilities. As

discussed above, credit for household

facilities is one of the potential market

segments. This may become an

extension of a housing finance product,

or may be developed independently.

However, it would require close

coordination with ongoing or proposed

government or NGO programs to provide

partial subsidy and technical support.

Box 1 illustrates the market-based product

development for MFIs supported by

MicroSave Africa, a donor-funded initiative

based in Kenya. It has also worked with a

number of MFIs to test these approaches. As

a result, services and products are designed

to meet client needs and have greater

opportunity for expansion. Any exploration of

opportunities to finance WSS-related market

segments should use such market-driven

methods.


There is an increasing recognition of the role

of small WSS service providers, especially in

improving access for the poor in rural and

urban areas. Studies in a few countries in Sub-

Saharan Africa suggest three WSS market

segments:6

Community-based small service

providers (CSSPs): particularly for water

schemes in rural areas

Private small service providers (PSSPs):

particularly for water and sanitation

services in peri-urban areas

Households as self-service providers

(HSSPs): particularly for sanitation and

household-level water facilities

Community-Based Small Service

Providers (CSSPs)

In almost all the countries in the region

governments have moved to CBOs for water

services in rural areas. Small to medium-sized

operations running into thousands of schemes

are found in different countries. These include

both point sources and piped schemes, either

gravity-based or motorized. It is likely that

motorized piped schemes would have greater

need for credit and financial services. For

most CSSPs, communities are involved in the

design and implementation of new schemes,

contribute to the capital investments, and

have complete management and financial

responsibility for operation and maintenance.

Potential demand for finance from these

CSSPs falls into two main categories:

For new investments: to meet the

community share in capital contribution

Though most countries provide partial

subsidies to meet the capital costs of rural

water supply (RWS) schemes, within the

demand-responsive approach, only a minimal

community contribution to capital costs is

required, generally ranging from 5 to 10

percent. The low share represents the

perception of a lack of affordability. However,

sustainable access to credit would enable an

increase without any adverse impact on

affordability, though this would require a clear

government policy on community contribution

and a ceiling on capital subsidy associated

with some notion of basic service levels.

However, for any government to introduce

greater community contribution, a fair degree

of outreach of microfinance is first necessary

as a base condition. Even where outreach by

microfinance institutions (MFIs) exists, the

lack of a cash-flow history for a new CBO

makes it difficult to assess the risks of such

lending. This may, however, be resolved by

MFIs lending to households to enable them

to meet their share of contribution to the newly

established CBOs, or where the MFI itself

operates through groups (see box 2).

The Nature of Latent Demand for Finance amongSmall Service Providers

6. Identification of these market segmentsis based on preliminary analysis for theSub-Saharan Africa region using studiesin three countries in ICC 2002; a study ofKenya in Virjee 2002; reviews in WorldBank 2003 and Mehta 2003; anddiscussions with stakeholders in the

region.


In this regard, it would be also useful to identify

the sources of funds used by communities in

cases where communities are required to pay

a higher share (as in many NGO projects), or

when communities develop water schemes

through their own efforts and funding.

In Kenya, for example, a number of CBO-

based RWS schemes have been developed

through high levels of community shares, in

some cases even being completely self-

funded.

For investments in major repairs/

rehabilitation/augmentation

In most countries government subsidies are

available for new investments but not for

meeting the costs of repairs or for

rehabilitation or augmentation of services.

Latent demand for finance for these activities

is explored in two contexts.

In some countries in Sub-Saharan Africa

management of small RWS schemes is being

transferred from centralized agencies, or

departments in central ministries, to CBOs.

Before such transfers, these schemes need

to be rehabilitated and augmented to achieve

improvements in services. Where there is a

history of user charge payments and the

possibility of linked service improvements, it

is often possible to grant credit to the CBOs

or households for this purpose. Box 3 provides

examples of such opportunities.

It is important for the sustainability of CBO-

based schemes to ensure that timely finance

is available for major repairs, as the

government does not take responsibility for

these. Access to credit can help ensure that

capital assets are not wasted. In addition,

such schemes demonstrate to the community

the benefits of doorstep water services,

leading to an increase in demand for service

provision and expansion, in turn resulting in

potential demand for finance. Box 4 illustrates

such demand from CBOs in Kenya.

In Benin, savings generated from user

charges are deposited with an MFI, providing

funds and possible credit for major

maintenance. The CBO managing the Kabuku

scheme in Kenya has also generated a

current account surplus and has explored

credit for expansion. However, the lack of

financial links with an MFI, and the difficulty

of offering acceptable collateral, make it

difficult for the CBO to access credit. Box 5

provides illustrations of the use of MFIs to

respond to the demand for financial services.

Similar findings are also evident from the

Box 2. Meeting the Demand for Partial Capital

Investments through Microfinance

The Groupe de Recherche et d’Action pour la

Promotion et Développement (GRAPAD) is a

microfinance institution established in 1993 through

support from the Catholic Relief Services. GRAPAD

provides loans to clients organized in groups. A group

in the peri-urban district of Hlazounto in Cotonou, Benin

approached GRAPAD to finance the installation of a

water pump, as the nearest water source is over a

kilometer away. This group of women, known as FIFA,

has had a 100 percent repayment rate on all its loans.

The women in the group sell drinks, maize, vin de

palme, soap, and firewood. FIFA has approached

Initiatives au Développement (IAD) to finance 80

percent of the installation cost of the water pump, which

is estimated at around FCFA 2 million (US$2,857). The

remaining 20 percent would be sought from GRAPAD

as a loan.

Source: ICC 2002.


Box 3. Transfer of RWS Schemes to CBOs in

Kenya: A Potential Opportunity

SIDA support to the transfer of RWS schemes. The

Swedish government has been involved in aiding the

Kenyan government with water projects since the 1970s.

Recently, the Swedish International Development Agency

(SIDA) has begun to fund the transfer of government-

implemented schemes to communities. The beneficiary

community is responsible for the initiation of the transfer

proposal and bears the design costs. The community

must be legally registered as a self-help group to make

an application. The program favors low technology, such

as gravity schemes and small systems. The water related

ministry provides assistance to applicants in the

refinement of preliminary proposals and is responsible

for the acceptance or rejection of proposals. SIDA

requires that the beneficiaries make a significant

contribution towards the capital cost of the rehabilitation

of the system. The level of contribution has ranged from

10 to 50 percent. Operation and maintenance of the

rehabilitated scheme then become the responsibility of

the community. Though at present no effort has been

made to link with credit for the community to meet its

share, this is a potential opportunity, particularly given

the improved outreach of microfinance in Kenya. This

will, however, require a clear policy on community share

in capital costs and efforts to link with MFIs and the

cooperative sector.

Nderu water project is a community project operating

two boreholes, which provide water for the community

within the project area. The project dates back to 1926

when a settler sank one borehole to obtain water for his

personal use. After independenc the county council of

Kiambu took over the operation of the borehole and

extended the distribution network The council continued

with the operation of the water facility but with great

difficulty. In 1990, mainly due to financial difficulties, the

facil i ty broke down and the power supply was

disconnected. In 1992 the community members

approached the county council of Kiambu and were

allowed to revive and manage the water project. Kshs

140,000 (US$4,500) was borrowed from two institutions

in the community Thairira Technical Institute and Mirithu

Secondary School. The loan proceeds were used to

rehabilitate the borehole and pay for an outstanding

electricity bills.Normal water operations resumed later in

1992, and after only six months of operation the

community had collected enough revenue to pay back

the loan after meeting its operation costs. The project

serves about 1,200 families and has been running

smoothly since.

Sources: SIDA project from BG Associates 2002, anddiscussions

with SIDA; Nderu project from WSP-AF2001.

experience in multivillage schemes in Senegal

(WSP-AF 2003b).7

Private Small Service Providers (PSSPs)

Several recent studies have highlighted the

important role being played by small private

providers in the provision of WSS services,

especially in urban areas. For example, Solo

(1999) suggests that over half of the residents

in urban areas of Africa depend upon

nonutility sources of water, and 80 percent

depend upon nonutility sanitation solutions;

and Collignon and Vezina (2000) found that

in Kayes, Mali, revenue collected by the

independent providers of water is double that

collected by the utility, and in Ouagadougou

and Bobo-Dioulasso, Burkina Faso,

independent providers collected revenues half

those of the municipal utilities. These studies

also highlight their demand for credit, which

often remains unfulfilled.

Types of PSSPs.

PSSPs are found mainly in urban areas and

small towns for both water-and sanitation-

related services, though more commonly for

water. Box 6 illustrates the main categories

found in African cities. In addition to these,

other PSSPs provide services to support the

delivery of water and sanitation services.

This category of PSSP covers a large range

of activities and varies considerably in

potential cash flow, investment required, and

legality of operation. These enterprises are

involved in production and supply chains that

produce, distribute, sell, and install water 7. Also see footnote 14.


access, storage, and purification

technologies. They include, for example,

companies that produce or distribute spare

parts, drill boreholes, sell pumps, build

storage facilities, or provide design and

management support to CBOs and small

towns.

Nature of demand for finance

Most PSSPs meet their working capital

requirements through user charges. However,

the lack of access to credit for capital

investments is often one of the main

constraints to new entry and expansion of

Box 4. Unmet Demand for Expansion and Augmentation in Two CBO Schemes in Kenya

Kabuku project. The Kabuku water project was first instituted through ministerial efforts by the Kenyan government in the

1970s. Poor design, together with insufficient funds, led to the collapse of the scheme in the late 1980s. In 1990, a CBO

was formed to rehabilitate and manage the rehabilitated scheme with initial funding from SIDA and a private company.

Since then the scheme has been managed by the CBO independent of external support. Members, who own the CBO,

elect a managing committee to ensure the efficient running of the scheme.

Four technical staff are employed by the scheme in this effort. Revenues come primarily from user fees, which in turn are

dependent upon the volume of water consumed by members. Kabuku has managed, since its rehabilitation, to collect

sufficient revenues to meet its costs, and a major expansion, the construction of a storage tank, was financed through the

use of the accumulated surplus generated from scheme revenues. However, efforts made by the CBO to raise additional

funds to augment the total capacity for water production have not been successful, despite its healthy revenue base. The

main constraint in this has been the inability of the CBO to offer acceptable collateral.

Gitaru self-help water project. The Gitaru self-help water project serves as an example of a successful communityrun

water supply project. The project was first developed in the 1970s when the area residents, without any donor or government

aid, formed a self-help group. Today, the scheme delivers piped water to 600 households, as well as providing kiosk

service to other households in the area. Extension of the service depends upon available capacity, and new users pay a

connection fee and agree to adhere to the scheme’s bylaws. The new user is also responsible for the installation of a

water meter and the local pipes to his/her dwelling. The water is charged according to a rising block tariff. The scheme

relies upon three boreholes, one of which is shared with a neighboring scheme, to meet the needs of its members. A

private company provides the technical support for the boreholes and oversees water quality. Four full-time employees

run the scheme, with an elected volunteer committee overseeing operations. The self-help group maintains a savings

account at a local branch of the Kenya Commercial Bank, which used to also offer bill collection services. The main

constraints facing the scheme are difficulties in financing large repairs, as collections are not sufficient to raise adequate

surplus to meet these costs directly. The CBO therefore has to rely on informal finance routes, such as the use of

harambee to finance major repairs and expansions. Funds generated in this manner can be unpredictable and irregular.

In such circumstances the availability of credit finance could be of great benefit. Further, the scheme would benefit from

renewed bill collection services offered by its banking outlet.

Sources: Kabuku from Gichuri 2000; Gitaru from Virjee 2002

service by small providers.8 Thus, potential

demand for finance from these different types

of PSSPs is mainly for capital investments,

either at entry level or for expansion and

augmentation after an initial period of

operation. Table 1 shows illustrative entry

costs associated with different types of SSPs.

Of particular note is the wide variation in

investment levels, depending upon the level

of technology. Manual latrine cleaners, for

example, invest only US$20–50, which

represents between 1 and 6 percent of annual

revenue for those businesses. Suction tanker

businesses require large capital investment,

which represents up to 90 percent of annual8. For example, see Snell 1998, where thisis cited as a key constraint.


revenue. Similar disparities exist in the water

sector, but with wider variation between

operators in different countries. This is due to

different regulatory environments and different

levels of utility development and coverage in

African cities. In most cases the PSSPs rely

on their own savings and borrowings from

friends and relatives. Depending on the level

of required initial investment, lack of access

to credit inhibits new entry and can therefore

limit competition. It must of course be

recognized that access to credit is just one

constraint and cannot be addressed in

isolation from other constraints, such as the

Box 5. Use of MFIs to Provide Financial Services for CBOs

Ethiopia. As a part of the Rural Water Supply and Environment Project (RWSEP, funded by the government of Finland)

in Amhara Region in Ethiopia, effort has been made to involve the Amhara Credit and Savings Institute (ASCI), the local

microfinance institution, in providing financial services to the CBO. Interestingly, of the community-based schemes supported

through this project nearly 60 percent (727 schemes) collect user fees and about 65 percent (472 schemes) of these use

the services of ASCI to deposit the fees collected. This uptake was aided by ‘letters of comfort’ from the program during

the initial stages and some capacity-building support. Greater familiarity with the process means these measures are no

longer needed. Regular saving with the MFI enables ready access to funds for repairs and maintenance. The program

provides technical support and has devised simple rules enabling withdrawals without unnecessary bureaucracy. While

so far this has not led to any loans, the cash flow history of a given CBO provides favorable conditions for the future. One

constraint has been the lack of a firm legal status for the water committees of the CBOs. However, the regional water

bureau is in the process of preparing a law giving legal recognition to these committees, which will make it easier for them

to get loans for major repairs or expansion/augmentation of services. In Ethiopia the Ethiopian Social Rehabilitation and

Development Fund (ESRDF), funded by the World Bank, has also used MFIs to channel project funds in one of the

regions where there is no other financial institution to provide such services. It is likely that this can move to links during

the operation phase, as in the RWSEP in Amhara Region, if appropriate support is provided at the initial stages.

Benin. GTZ/KfW are experimenting with microfinance and water programs in two villages in Benin: Allonkphon and Zian

in the Oueme and Mono regions. Members of these two villages have created committees to manage and sell water

sourced from a pump installed by a donor. The water is sold and revenues go into two bank accounts.

Both villages have accounts with the largest rural MFI, CRCAM, and earn 3 percent interest on savings: 80 percent goes

into a savings account (which is used for maintenance in case of breakdown) and the remaining 20 percent is used for on-

lending to the village population for new connections.

Senegal. A study from Senegal also suggests that the ASUFORs (borehole users’ associations) for rural multivillage

water schemes use the well-developed banking network in rural areas in Senegal. “They are becoming major clients by

virtue of the considerable proceeds from water sales that are deposited in their bank accounts. This situation should

facilitate the ASUFORs’ access to credit for the maintenance or replacement of water systems.”

Sources: Ethiopia from Bekalu 2003, RWSEP 2001, and ESRDF 2002; Benin from ICC 2002; Senegal from WSP-AF 2003b.

need for transparency in contracts with the

PSSPs, efficiency in billing and collection

systems used by the PSSPs, and regulation

to ensure fair competition (Snell 1998).

The potential demand for finance from the

PSSPs is likely to be affected by their location

– in urban informal settlements a key aspect

would be the legal and regulatory framework

within which they operate, whereas in rural

areas related policies and programs are

influential; and by the size of investments

needed – there is greater demand for finance

from activities requiring larger investments.


Box 6. Categories of Water and Sanitation PSSPs in African Cities

Water service providers:These include service providers in informal settlements, those catering to the special demands

of the rich and commercial establishments, and emerging providers in small towns.

Water resellers: kiosks. These are widespread in cities in this region and often operate in informal settlements where it is

difficult to provide private individual connections. Kiosks may include storage facilities or, when legal status is tenuous,

simply consist of a lockable standpipe. They are responsible for the installation and maintenance of the infrastructure and

may not be formally regulated, in terms of price or service quality. However, they are often licensed for connection from

the utility, and there is often a special kiosk rate for water.

Water vendors. Water in African cities is also often delivered to the point of use. At the low end of the technology scale,

water vendors carry containers of water to customers for a low fee using either handcarts or animal traction.

Water is sourced from a standpipe, and priced in the range of US$ 2 to 6 per cubic meter, compared to US$ 0.6 to 1.5 from

a standpipe. Due to the higher prices households tend to use water vendors where timesaving results in financial gain,

and also tend to economize on volumes of water used from this source.

Water truckers. Water truckers tend to supply high-volume customers with water, including commercial and institutional

customers, construction sites, and private villas. Water truckers exist in cities where the utility responsible for supply has

an erratic and unreliable service. Though the investment required for water tankers is significant, it can be recouped within

a short time, given the strong demand in many cities.

Borehole operators. Private operators also manage boreholes, often to supply water to truckers. In some cases they

combine the borehole and trucking businesses into one operation in order to internalize the activities and benefits.

Small water networks. Some operators install small piped networks to supply their customers with water, using either

utility connections or other private sources. In Nairobi (Kenya) and Abidjan (Côte d’Ivoire), for instance, private water

networks supply water to areas where the utility responsible for water supply does not operate. In some countries such

operators have been promoted in small towns through special programs, as in Mukono and Seguku in Uganda.

Sanitation service providers. These include service providers in informal settlements and small towns, and those catering

to the special demands of the rich and commercial establishments.

Public toilet operators. In many African cities public toilet facilities, due to lack of maintenance, have fallen into disrepair.

Municipal authorities often allow private operators to operate the toilet facilities on a pay-on-use basis. The arrangements

vary from lease-type arrangements to full concessions, where the operator is required to invest his/her own funds in the

rehabilitation effort.

Manual latrine-cleaning services. Due to minimal sewerage coverage in African cities many inhabitants rely on pit latrines

for their sanitation needs, so the demand for latrine-cleaning services is quite significant. Manual exhausting of latrines

entails the use of a shovel and bucket to periodically remove the excreta from the latrine. Due to the hygiene risks

involved, the occupation tends to carry a significant social stigma. Such operators tend to work for people they know, in a

very local area, and earn very small profits.

Suction truckers. Wealthier households employ mechanized suction truckers to empty their septic tanks. This system is

preferable to manual exhaustion due to the shorter time required to empty the pits and the possibility of waste disposal at

a distance. They operate in the formal sector, as vehicle registration is required. Their earnings can be quite high; some

operators in Nairobi (Kenya) and Bamako (Mali) have daily earnings of over US$100.

Sources: Collignon and Vezina 2000 and Solo 1999.


Sanitation Sector Operations

Manual latrine-cleaning

equipment

Secondhand suction truck

Public latrines and shower

facilities

Sludge treatment plant using

ponds

Water Sector Operators

Handcart

Water truck

Standpipe

Overhead water tank to fill trucks

Private borehole + standpipe

Small network with standpipes

Small network w/metered

household connections

Source: Collignon and Vezina 2000, table 3.3, p. 14.

Dakar (Senegal)

Bamako (Mali)

Nairobi (Kenya)

Bamako

Ouagadougou (Burkina

Faso)

Dakar

Kampala (Uganda)

Bamako

Kampala

Cotonou (Benin)

Ouagadougou

Bamako

Nouakchott (Mauritania)

Nouakchott

Nairobi

Kampala

Ouagadougou

Dakar

Nouakchott

Kampala

Nairobi

Conakry (Guinea)

Cotonou

Guerou (Mauritania)

25

19

50

15,000

8,300

16,700

25,000

200

3,500

200,000

50

120

135

15,000

13,000

7,500

50

700

700

2,000

37,400

12,500

1,500

3,000

(per km)

Table 1. Entry Costs and Sources of Finance Used by PSSPs in Urban Areas in Africa

Own and family savings

Formal or informal loan


Own funds and bank

loan



and earning from other

activities



Bank loan

NGO loan


User subscription fees

Type of Investment Usual Source of Finance Cities Unit Cost(US$)


Figure 1: Possibilities for Meeting the Potential Demand for Finance by Various PSSPs

Informal privatepipe networks

Formalcommercial

finance

En

try-

Lev

el C

apit

al In

vest

men

t

Water tankers Suction truckers

En

han

ced

leg

itim

acy

Water kiosks

Standpipes

Handcarts

Microfinance

Ownsavings/friends

Manual latrineexhausters

Degree of Formal/Legal Status

Figure 1 illustrates the influence of the legal

status of the PSSP (through a license or a

franchise) and the scale of capital investment

on selection of particular finance solutions. As

legitimacy increases, potential for credit

increases, using microfinance products for

small investments; and as investment size

also increases, formal sector commercial

credit products become relevant. If the scale

of investment is very small, however, there

may not be demand for credit, as in the case

of manual latrine exhaustion, which requires

low capital investment. In such cases, own

savings or help/borrowing from relatives/

friends are sufficient.

Figure 1 indicates that at some medium level

of investment, with adequate legal status,

there would be demand for microfinance

products. As indicated, it is most likely that

water kiosks and small private networks

operate in this realm and represent potential

microfinance clients.

Capital investments for expansion and

augmentation.

To achieve financial sustainability the PSSPs

need to increase their service coverage, which

in turn is often dependent on access to credit

for the necessary capital investments. The

size of such investments is likely to vary

depending on the technology, level of

expansion needed, and prevailing costs.

However, it may be easier to provide credit

for this, as a cash-flow history already exists;

tenure-related issues can be assessed based

on past experience, and demand for their

services may be easier to assess. Thus, while

legal and regulatory issues would still need

to be addressed, credit may be structured on

the basis of past history.


Are PSSPs in the region using credit?

Studies in the region suggest that there has

not been commercial credit offtake by PSSPs

through either MFIs or the formal finance

sector on any significant scale. However,

several examples do exist from a number of

countries of individual PSSP clients having

borrowed to start or to expand their WSS-

related businesses, as illustrated in box 7.

These examples illustrate the potential for

credit in the sector. However, to articulate this

and develop it into a reasonable market more

attention will need to be paid to enhancing

legitimacy, as shown in the examples in box

10.

Households as Small Self-Service

Providers (HSSPs)

Households are often their own service

providers. They may use their own private

water sources, or other natural sources such

as wells or rivers, and their own latrines for

sanitation. While many households in rural

areas depend on shallow family wells for

water, these are often not acceptable by public

authorities as providing access to ‘safe

water’.9

There are some exceptions, such as the

Zimbabwean program described in box 8. In

this program, the family is expected to

contribute about two-thirds of the total cost

(about US$80 per family in 1992). In most

sanitation-related programs the emphasis is

also now shifting away from any household

subsidies. The cost of a sanitary latrine is likely

to range from about US$ 15 to 150 in different

countries in the region, according to the type

of technology used and rural/urban location.

These are lumpy investments for most poor

households, and access to credit would

enable more households to install such

household-level facilit ies. However,

particularly in the case of sanitation, such

efforts require support from the government

and other stakeholders (NGOs) for demand

promotion and adequate technical support in

order to provide cost-effective solutions and

quality control.10

A household may also require credit to pay

the connection fees to gain access to an

improved system, possibly a CBO-based

system in rural areas (refer to box 5 for such

Box 7. Business Loans to PSSPs for Capital

Investments: Some Illustrations

Benin. PAPME, a Beninois MFI, has a large number

of clients that borrow money for purchasing pipes, taps,

and hoses for the purpose of making a profitable

business out of providing infrastructure to water and

sanitation. With the privatization of the water utility,

PAPME hopes to take advantage of this by extending

its outreach to cover more water and sanitation clients.

Benin. Denis Todogledji is a water seller in the

periurban areas of Cotonou. He transfers water from

the peri-urban mains to the rural areas via a 2-kilometer

pipe, which cost him FCFA 600,000 (US$857). There

is a counter on the standpipe which the Société

Béninoise d’Eau et de l’Electricité (SBEE) has installed

(at a cost of FCFA 64,000). Denis employs two water

sellers at this point. SBEE sells water to him at FCFA

290/m3 and he resells it for FCFA 350–400/m3. In order

to finance his operations, Denis borrows from a local

MFI.

Uganda. A Ugandan MFI, CMFL, had a client who took

a loan to construct a well and on-sell water as a

business venture. According to CMFL’s chief

operations officer the client’s business was extremely

profitable, resulting in a repeat loan to expand WSS

activities. Another MFI in Uganda, UMU, provided a

client with two loans to purchase water tanks.

Source: ICC 2002.

10. For example, in more denselypopulated rural areas and in urban informalsettlements location of latrines needs tobe planned to avoid pollution of watersources.

9. In Zimbabwe these wells are verycommon, and there has been a program,funded by SIDA, Rotary, and WaterAid,to support their upgradation (Morgan1996).


Box 8. Family Wells Program in Zimbabwe: Potential for Credit to Enhance Coverage

Many rural households in Zimbabwe live in areas where groundwater is relatively abundant. Given this, wells are often

used to supply water to rural households. Many of these households rely upon family-owned hand-dug shallow wells,

which offer the advantages of accessibility, clear ownership, inexpensive technology, and simple maintenance.

Traditional hand-dug wells, however, are prone to contamination, making them scarcely better than unprotected, untreated,

surface water sources. Simple technical improvements, such as lining the well and using a concrete cover and apron to

ensure that water drawn from the well cannot spill back into it, allow for a significant improvement in water quality. The

Zimbabwean government, through its family well program, offers a subsidy of cement and a windlass to families wishing

to upgrade their wells. Families are required to contribute the required labor, bricks, buckets, and rope. In most cases, the

capital contribution by the beneficiary amounts to over 60 percent of the total capital improvement cost, and the cost to

government is about US$3 per person.

Families wishing to obtain a subsidy for an improved well are required to show commitment to the improvement by

deepening and lining their existing well (or constructing a new lined well), and are subsequently responsible for the entire

maintenance cost associated with the improved well. By 2002 50,000 upgraded family wells had been built across Zimbabwe,

serving a total of half a million people.

Funding has acted as a constraint to increased installation of upgraded wells, despite the fact that most of the capital cost

is borne by the recipient family. It is likely that if such an effort is linked with access to microfinance for households, and

the government role is limited to demand promotion and technical support, it would result in increased coverage.

Sources: Morgan 1992 and 1996; Robinson 2002.

credit in Benin) or through an urban utility. This

has not been common in Africa, as in most

cases the utilities have avoided providing

private connections in poor neighborhoods or

informal settlements.

However, recent programs in India have

util ized microcredit through individual

borrowing to finance fees for new connections

in slum settlements. This, however, does

require readiness of the local utility to provide

services to these customers, and possibly a

program framework to support its

implementation (World Bank 2003). Similar

opportunities may arise in future programs

aiming to improve services in urban informal

settlements in this region, if the issues of

tenure are addressed.

Responding to Country Contexts

While exploring such opportunities, it is

essential to respond to the given country

context by considering such factors as WSS

policies and the status of the microfinance

sector. Box 9 provides some illustrations of

potential opportunities that may be explored

within these contexts. To articulate these

opportunities, it is essential to provide greater

space for such linkages in WSS strategies and

support them through action research where

relevant.


Box 9. Exploring Potential Opportunities in Selected Countries

Benin. The microfinance sector in Benin is well developed, with an outreach of over 350,000 members. It has reasonable

penetration, as most MFIs are concentrated in urban areas in the southern region. Existing MFIs have been financing

PSSPs in urban areas and see opportunities for further growth. Future opportunities exist both in consolidating the

partnership between the utility and PSSPs, and in expanding microfinance outreach to rural areas. In both cases, market

research to establish the nature of demand will be useful. From the perspective of the WSS sector, the focus needs to be

on creating and supporting space for private/community finance, particularly for RWS.

Kenya. In 2002 Kenya passed a new Water Act, opening the sector to numerous institutional changes, including

decentralized water provision. Under this act water service providers will enter into contracts with the water services

boards, and be subject to regulation by the water services regulatory board. Kenya is endowed with a relatively well

developed microfinance sector: the cooperative sector has an outreach of over 1.7 million clients and an outstanding

portfolio of US$0.4 billion, and there are also some very effective MFIs such as K-REP. Opportunities in rural areas

include working with existing CBOs to provide financial services and credit for repairs and augmentation; the provision of

credit for rehabilitation linked to the transfer of existing public sector schemes to CBOs; and the initiation of project

financial services in new schemes. This requires both a firm legal basis for the CBOs and appropriate technical support.

In urban areas, the large number of PSSPs may present opportunities. Market research is necessary to understand their

finance needs. It will also require clarification of the link between the utility (city councils or new city water companies) and

the PSSPs. The possibility of using the SACCO model for both rural CBOs and PSSPs working in urban informal settlements

needs to be explored.

Ethiopia. In rural Ethiopia CBOs are responsible for WSS. With decentralization this responsibility will increase. The

microfinance sector is relatively new, and has so far been dominated by government-supported MFIs. Of the total coverage

of about 0.6 million clients the share of the largest four MFIs is nearly 90 percent. In some regions, however, these MFIs

are the only financial services in rural areas. Some donor programs are already using the MFIs for financial services in the

implementation of rural water supply and sanitation projects, and to provide services to CBOs during operations. These

show potential for improved financial management of CBOs and will possibly extend to credit for repairs and augmentation

at a later stage. These opportunities need to be assessed and explored further, for example through action research. This

would enable their effective incorporation into a countrywide RWS program. It would also be useful to explore the possibility

of links with the proposed support program, funded by the International Fund for Agricultural Development (IFAD) and the

European Union (EU), for strengthening the microfinance sector in Ethiopia.

Uganda. Uganda has a few relatively mature and financially viable MFIs, though their collective outreach is only about

half a million clients. The emphasis in the microfinance sector thus needs to be on increasing the outreach of MFIs while

maintaining their financial sustainability. The WSS strategy in Uganda envisages limited community shares, mainly through

noncash contributions for rural water schemes, though for household sanitation there is generally limited or no subsidies.

However, lack of effective functioning and sustainability seem to be problems faced by many existing schemes. Uganda,

in its efforts to develop productive links between WSS and the microfinance sector, may learn something from the Ethiopia

experience of using the MFIs to provide financial services to CBOs for scheme implementation and later operation (see

box 4).

Zambia. In Zambia the potential need for credit exists in both rural and urban WSS sectors: in RWS the emphasis is on

management by CBOs, and in peri-urban areas efforts are being made to evolve both CBO-based schemes and participation

by PSSPs. However, the microfinance sector in Zambia requires further development before links with WSS can be

usefully explored, though there may be some potential in current NGO initiatives to develop links between CBOs and MFIs

through action research.

Sources: Based on the findings in ICC 2002, Virjee 2002, and preliminary inquiries in Ethiopia.


A Summary of Demand, Risks, and

Support Requirements

The nature of demand, risks, and support

requirements varies across the three types

of SSPs discussed above. Table 2 provides

a summary of potential demand among the

three market segments of the small WSS

service providers. Amongst these, the

potential appears greater for the first two

market segments in view of prevailing WSS

policies. On the other hand, given the stronger

links of the microfinance sector at retail level

with 14 individuals and households, the third

market segment is important and needs to be

explored further, especially as achievement

of the water and sanitation MDGs may be

expedited by an emphasis on credit at

household level.

The potential demand by CBOs in rural areas

for finance to contribute towards capital costs

is dependent on appropriate policy and

finance rules that create a ‘financing space’

and do not crowd out community

contributions. This requires a clear definition

of which basic services need to be universally

provided, and an appreciation of the ability

and willingness to pay for these services.

Additional factors relate to the legal basis of

the CBOs, as this will influence the risk

perception of the lenders. An appropriate

regulatory framework for the operations of

PSSPs is also critical in converting latent

demand into a larger market for microfinance.

These factors also affect the perennial

problem faced by these potential borrowers

of lack of collateral. A formal legal and

regulatory basis would help to address the

collateral issue to some extent. In addition, it

would be through building cash-flow history

that the SSPs can establish credibility for

potential borrowing for major repairs,

expansion, and augmentation. While in many

cases there is potentially a large market for

such credit, its realization and articulation

requires an appropriate policy framework and

technical support to the small providers and

local finance institutions.


Table 2. A Summary of Potential Demand from Small WSS Service Providers

Types of Risks

CSSPs

PSSPs

HSSPs

New schemes: to meetpartial contributions innew investments

Transfer of schemes toCBOs: to meet partialcontributions forrehabilitation/augmentation

Ongoing schemes:financial services, creditfor major repairs,expansion, oraugmentation

For capital investmentsin a new operation or toexpand/augment services

To meet full/partialcontributions in familywells/water facilities

To meet connection feesto CBO scheme or anurban utility system

To meet full/partialcontributions forhousehold latrines

Larger community contributionsare crowded out by the designofsubsidy policies: especiallyrelevant for high-cost schemesproviding higher level ofservices

Potentially large market inAfrica with the emphasis ondecentralization anddemandresponsive approaches

In transfer of schemes, likelyproblem of lack of incentives forCBOs to participate

For emerging systems in smalltowns potential privateinvestments are often crowdedout: use of minimum subsidyconcessions may be useful

High cost and short tenor ofconventional microfinanceproducts poses a constraint, asinfrastructure lending requiresmedium-to long-term tenor

Generally not recognized inmost publicly funded programsas an appropriate option

Potentially large market in ruralCBO-based schemes, butdependent on a program andtechnical support

Needs to be linked to a demandpromotion program as well asappropriate technical support

Potentially large market

Risk of new CBO without any creditor cash-flow history

In some cases, lack of a clear legalstatus of the CBO is likely to be aproblem

In ongoing schemes, past cash-flow history through user chargescan be assessed. Also, the risk islowered, or can be betterassessed, as the MFI establishesa relationship and cashflow historywith the CBO

In new schemes or transfer ofschemes, close coordinationrequired with government/NGOs/donor programs

For PSSPs in urban informalsettlements, lack of a firm legalbasis and regulatory frameworkposes a significant risk

More amenable to microfinancelending due to the individualborrower

For urban utility, the main problemis wil l ingness to provideconnections to the low-incomecustomers in informal settlementsdue to the legal tenure issues

Lack of easily perceived financialreturns or savings for thehousehold, making publicly fundeddemand promotion critical

Types of

SSPs

Nature of

DemandFactors Affecting Potential

Opportunities


The main role of governments is to create an

enabling environment for the small providers

and for the institutions that provide

microfinance services, both through policies

and through specific support programs.

Actions by development partners, be they

donors, multilateral financial institutions, or

large NGOs, need to be guided by ensuring

microfinance institutions have space in which

to operate, capacity building support, and

access to medium-term capital. The

resources of development partners should be

targeted to support governments and

institutions that have sustainable policies. This

section outlines actions that may be taken by

governments and development partners in

this context. However, given the limitations

of the microfinance sector, demand for

financing needs to explore other avenues,

such as suppliers’ credit, leasing, and

franchising.11

Some key aspects to be addressed by

governments and development partners

include:

Ensuring financing space through policy

and programs.

It is important to define and apply financing

rules that create financing space without

crowding out household, community, and

private finance. This finance could be for new

investments that provide a higher level than

basic service, for rehabilitation under transfer

programs, for repairs, and for expansion and

augmentation. In addition countries need to

have clear policies setting out basic service

levels beyond which costs need to be met

entirely by households/communities.

However, this does require considerable

planning related to defining appropriate and

nationally affordable standards, the costs of

achieving these standards in different regions

of the country, and an understanding of

willingness to pay for WSS services. For

development partners it is necessary to work

with governments to ensure that such

financing space exists, and to include this in

their funding by insisting on adequate

community share for services above the basic

service levels.

This is well illustrated by the findings of recent

studies of small and medium enterprises

(SMEs) for water in small towns in Ghana. As

Gross (2003) reports, in the past donor

“support was provided at little, or most often,

no financial cost to the SMEs. While such

schemes have helped (. . .) to meet project

objectives, they have distorted the market in

the long run. Further, they have discouraged

firms establishing formal relations with banks

or financial institutions that could potentially

offer financial services on a more sustainable

The Role of Governments and DevelopmentPartners

11. For example, see Toyoshima 2002 forideas on the use of leasing for smallproviders, and Roche, Revels, and Amies2001 for ideas on franchising.


basis.” It is suggested that “the future strategy

should aim to link enterprises working in the

water sector with such institutions rather than

creating new support schemes. The CWSA

has now started to do so by pursuing a

partnership with Leaseafric, a commercial

leasing company that has just developed a

microleasing program with World Bank

guidance. It is also holding a series of regional

workshops on microfinance institutions and

how to access credit for SMEs” (Gross

2003:7)

Appropriate regulatory framework and

partnerships with SSPs.

In many countries, public departments or

utilities are mandated to provide water supply

services in both urban and rural areas.

However, often these utilities are not able to

reach a vast majority of residents, who then

need to rely on a variety of SSPs. It also forces

these SSPs to operate without adequate

legitimacy and face unpredictable policy

regimes. The most recognizable case is that

of the informal PSSPs that operate in many

urban areas, especially in informal

settlements.

Although there is an emerging shift to CBO-

managed schemes in rural areas, a lack of

clarity often persists in the status of CBOs and

ownership of assets (refer to box 3 on the

experience in Kenya). A regulatory framework

that recognizes the various SSPs and is

backed by supporting policies and, preferably,

a support program would enable the SSPs to

operate in an environment that was more

predictable and more conducive to accessing

market-based resources from banks and

MFIs.

Refer to box 10 on the experience of

partnership between the local utility and the

small private providers in Benin and Zambia.

Appropriate regulatory framework for

microfinance.12

It is important to develop a legal and regulatory

framework that provides a favorable

environment for the development of

microfinance according to the best practices

and standards. Increasingly, individual

governments have issued decrees to regulate

microcredit activities through registration.

These have tended to differentiate between

those MFIs that can mobilize savings for

onlending and those who are restricted to

credit provision using only their own sources

of capital. In most cases the legal framework

has been developed to protect depositors and

to ensure the security of transactions.

Information dissemination and enforcement

of legislation vary from country to country and

from region to region. Such regulatory efforts

should highlight the necessity of financial

sustainability in microfinance operations.

“Although increased regulation of the sector

has, on the whole, been welcomed by most

sector representatives, many believe that the

regulatory framework imposed by individual

governments poses problems for the longer

term development of the microfinance sector.12. This section is largely based on ICC2002, volume II.


Box 10. Illustrations of Partnerships between the Utility and PSSPs

Benin: Société Beninoise d’Eau et de l’Electricité (SBEE). Benin provides a case where collaboration between the

central utility, SBEE, and independent resellers has led to increased service coverage where government did not have the

funding to expand service to the entire population. PSSPs enter into an agreement with SBEE, and fall into one of three

categories: metered rural groups, urban groups, or urban resellers at standpipes. In order to become a supplier of water,

a PSSP submits an application to SBEE for a connection. The new operator then pays a connection fee and a water tariff

of US$0.5/m3 for the water sold. Given the formal legitimacy of the SSP franchise, operators are able to access finance

facilities. Microfinance institutions offer loans to operators to extend their networks or invest in other capital, and as their

formal legitimacy decreases the risk of lending and the cost of lending are also lowered. L’Association de Revendeurs

d’Eau du Benin (AREB) was formed in 1999 and has over 150 members operating in the Cotonou area. Members have

over 20 years’ experience in selling water. More cooperation is, however, required. Though each member has a base of

over 500 clients many find it hard to survive on this business alone. They claim problems with high tariffs charged by the

water utility, low water pressure causing time and water wastage, and poor quality of pipes causing leakages.

Zambia: Lusaka Water and Sewerage (LuWS). LuWS is the city’s utility and was established in 1988. It sources water

from both surface reservoirs and groundwater sources. Some of the utility’s piped network exists in periurban areas and

water from this source is administered through communal taps. LuWS has decided not to extend its network into these

areas due to infrastructure constraints, cost, and level of water supply. It has instead developed a satellite system whereby

water is pumped from on-site boreholes into elevated tanks, chlorinated, and distributed through communal standpipes. A

network of 50 standpipes services eight areas within the settlement. The structure is managed and maintained in close

collaboration with LuWS, who run it as a subbranch of their existing operations.

The actual distribution of water is managed by a community-elected resident development committee (RDC), which appoints

attendants to open the taps at certain times of the day and to monitor consumption using preinstalled water meters.

Customers are charged a fixed monthly fee of K 3,000 (US$0.77) for water and K 1,500 (US$0.38) for maintenance.

Those customers that are unable to pay monthly fees can access water at a cost of K 50 (US$0.013) per 20 liters. Money

collected by the RDC is surrendered to the local LuWS branch that is responsible for maintaining the system. So far, these

fees have not been sufficient to cover maintenance costs and the project continues to rely on donor support. The

responsibility of overseeing the project has since been taken over by CARE International, who established a water trust to

manage the project more effectively. This trust consists of representatives from the local council, LuWS, the RDC, and the

community. It employs staff to manage operations and maintenance. Through a contract with LuWS the trust falls within

the regulatory framework and thereby extends the utility’s coverage in the city. The estimated coverage of this project is

over 10 percent of Lusaka’s residents.

Source: ICC 2002.

Given the emphasis in microfinance on providing savings and on accessing funding from

nondonor sources, most MFIs will need to move from the association or international NGO

form to a more permanent form as some type of financial institution.

Many believe that governments should make efforts to find suitable alternatives that, while

satisfying the legitimate concerns of regulators, also allow MFIs to become commercially and

financially viable. The creation of a legal framework specifically suited for MFIs, such as a

‘microbank’, with reduced capital and reporting requirements, or for credit unions, which would

reduce the existing restrictions for many credit cooperatives and credit and savings

associations, are alternatives that should be explored by stakeholders to foster the development

of the sector” (ICC 2002, II:33–35).

In the medium to long term these measures would help to increase the emphasis on savings

for resource mobilization and reduce the cost of funds.


Support to communities and microfinance

providers for articulating demand for

finance

A recent study of sanitation in Kenya shows

that communities listed inadequate financial

ability as a major hindrance to improved

sanitation, particularly for building a new

latrine (BG Associates 2003). Similarly,

existing CBOs are often unable to expand

coverage or augment services despite

demand from their members or adjoining

neighbors (see the examples in box 4).

In such cases, households and communities

need assistance to articulate their demand for

finance in a form that would attract the interest

of relevant financial institutions. As many of

the typical microfinance providers lack the

necessary capacity to work with

organizations, and lack experience in

structuring and lending for infrastructure

projects, support will be required for both

communities and finance institutions. This

may be through the efforts of an intermediary

NGO or through a special support program.13

This support should aim to provide an

expression of demand for finance within the

principles of sustainable microfinance, and so

account for market realities in the

microfinance sector.

Support action research through pilots

Despite the constraint of low development of

the microfinance industry in Sub-Saharan

Africa, it is possible to outline some potential

opportunities for microfinance in the WSS

sector that will also contribute to development

of the microfinance sector. Some specific

opportunities are also identified for the five

countries that were reviewed in box 9. Donor

support for action research through pilots

would help to develop these ideas further and

assess their potential for scaling up. Such

measures are made more urgent by the

importance of such financing in achieving the

WSS-related MDGs.

Particular emphasis is needed also on

household-level finance, due to its suitability

both for WSS and for microfinance providers.

Knowledge management.

Globally a number of different approaches are

emerging, and considerable innovation is

taking place both in microfinance and in the

financing of WSS sectors. While practical

solutions have to be developed in local and

specific contexts, the sharing of experience

regionally and globally helps to develop and

refine new ideas and fill knowledge gaps.

Development partners who work in multiple

countries and regions are well placed to

support global knowledge management.

Many regional programs already support

WSS and microfinance sectors separately.

Opportunities to transfer and exchange

knowledge across these programs need to

be strengthened.

Conclusion

The key point emerging from the above

analysis is that there is emerging evidence of

latent demand for finance among the SSPs

in the WSS sector. However, articulation of

13. For example, see World Bank 2003for the outline of a possible supportprogram for sustainable private finance forcommunity infrastructure in India.


this demand requires technical support and demand promotion, and realization at scale requires

changes in government policy to provide financing space for communities, and regulatory

environments that encourage the stability and predictability needed by SSPs. On the other

hand, development of the microfinance sector in Africa is still evolving, and needs to extend

its outreach, as well as its sustainability, to offer any significant support for financial services

and credit. However, some countries, such as Kenya, have relatively well developed financial

systems in which significant outreach and penetration are available.

In this context pilot interventions would be relevant where the microfinance sector had some

presence. This would need to be supported through appropriate partnerships between the

WSS and microfinance sectors in order to reduce or overcome policy and regulatory risks.

For a given country, the potential needs to be assessed in relation to the level of development

of the microfinance industry and specific WSS opportunities. With a moderate/growing

microfinance sector, as in Ethiopia, Kenya, or Senegal, action pilots may be taken up at a

reasonable scale.


Note: The word “processed” describes informally reproduced works that may not be commonly availablethrough libraries.

Bekalu, Tesfaye. 2003. “Use of MFIs in Community-Based RWS Schemes in Amhara.” Field Note.Processed.

BG Associates. 2003. “Learning from the Past and the Present for the Future: Sustaining Sanitation andHygiene in Kenya.” Report for the Water and Sanitation Program-Africa. Processed.

Bonn Conference on Freshwater. 2001a. “Water – A Key to Sustainable Development, Recommendationsfor Action.” Adopted at the International Conference on Freshwater, Bonn, December.

.... 2001b. “Ministerial Declaration.” Adopted by ministers meeting in the Ministerial Session of theInternational Conference on Freshwater, Bonn, December.

Camdessus, Michel. 2003. Financing Water for All: Report of the World Panel on Financing WaterInfrastructure. March.

Chao-Beroff, Renee, and others. 2000. “A Comparative Analysis of Member-Based MicrofinanceInstitutions in East and West Africa.” Report for MicroSave-Africa. Processed.

ESRDF (Ethiopian Social Rehabilitation and Development Fund). 2002. “Report of an ESRDF ReviewWorkshop.” Processed.

Gichuri, Wambui. 2000. “Kabuku Water Project in Kenya.” Paper presented at the International Workshopon the Role of Women in Poverty Alleviation through Sustainable Irrigation, South Africa. Processed.

Gross, Alexandra. 2003. “Ghana SMEs in Small Towns Water Project.” Final Report for PPIAF. Processed.

ICC (International Capital Corporation). 2002. “Rapid Assessment in Sub-Saharan Africa on FinancingWater and Sanitation through Microfinance.” Report prepared for the Water and Sanitation Program-Africa. Processed.

Kayaga, S. 2003. “Public-Private Community Partnerships for the Poor: The Case of Small TownsWater Supply in Uganda.” PPCPP Session, 3rd World Water Forum, Japan.

Mehta, Meera. 2003. Meeting the Financing Challenge for Water Supply and Sanitation: Incentives toPromote Reforms, Leverage Resources, and Improve Targeting. Water and Sanitation Program andWorld Bank.

MicroSave-Africa. 2001. “MicroSave-Africa: Rationale and Project Description.” Processed.

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AFCAP : Microfinance Capacity Building Program in Africa (Anglophone)

AFDB : African Development Bank

AREB : L’Association de Revendeurs d’Eau du Benin

ASCI : Amhara Credit and Savings Institute

CAPAF : Microfinance Capacity Building Program in Francophone Africa

CBO : community-based organization

CGAP : Consultative Group to Assist the Poorest

CSSP : community-based small service providers

DFID : Department for International Development

ESRDF : Ethiopian Social Rehabilitation and Development Fund

EU : European Union

FDCF : Financial Deepening Challenge Fund

FSA : Financial Services Association

GRAPAD : Group de Recherche et d’Action pour la Promotion et Développement

HSSP : Household as Small Self-service Provider

IAD : Initiatives au Développment

IFAD : International Fund for Agricultural Development

LuWS : Lusaka Water and Sewerage

MDG : Millennium Development Goal

MFI : Microfinance Institution

PSSP : Private Small Service Provider

RDC : resident Development Committee

RWS : Rural Water Supply

RWSEP : Rural Water Supply and Environment Project

SBEE : Société Béninoise d’Eau et de l’Electricité

SIDA : Swedish International Development Agency

SSP : Small Service Provider

Abbreviations and Acronyms

December 2003

WSP MISSION

To help the poor gain sustained

access to improved water and

sanitation services.

WSP FUNDING PARTNERS

The Governments of Australia, Austria,

Belgium, Canada, Denmark, Germany,

Italy, Japan, Luxembourg, the

Netherlands, Norway, Sweden,

Switzerland, and the United Kingdom, the

United Nations Development Programme,

and The World Bank.

This paper has been prepared by Meera

Mehta(WSP-Africa) and Kameel Virjee

(Knowledge Intern), based on studies by the

International Capital Corporation (ICC 2002),

Kameel Virjee (Virjee 2002), and a review

of available literature and information from

WSP-Africa focus countries. Tesfyae Bekalu

provided input for Ethiopia. The paper has

been peer reviewed by Robert Buckley and

Caroline Van Den Berg. Their feedback has

especially helped to improve the basic

reasoning and structure of the paper. We

have also benefited from feedback from

Bharti Ramola Gupta, David Redhouse, V.

Satyanarayana, Joseph Narkevic, Belete

Muleneh and Maimuna Nalubega.

Copy Editor: John Dawson

Production Assistance: Sarah De Villiers

Leach, Njeri Gicheru and Vandana Mehra

Photograph: WSP-Africa

This document is available online at

www.wsp.org

Cover Layout and Design: Peter WambuPrinted at Kul Graphics Ltd.

The findings, interpretations and conclusions expressed in this report are entirely those of theauthors and should not be attributed in any manner to the Water and Sanitation Program. TheWater and Sanitation Program does not guarantee the accuracy of data included in thispublication or accept responsibility for any consequences of their use. Dissemination of thematerial in this report is encouraged and the Water and Sanitation Program will normally grantpermission promptly. For questions about this report, including permission to reprint portions orinformation about ordering more copies, please contact the Water and Sanitation Program.Email: [email protected]

Water and Sanitation Program-Africa, P.O. Box 30577 - 00100, Nairobi Kenya

Phone: 254 20 3226370, Fax: 254 20 3226368

Email: [email protected], Website: www.wsp.org

Financing Small Water Supply and Sanitation Service Providers.

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